UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Securities Act of 1933
Release No. 7662 / March 31, 1999
Securities Exchange Act of 1934
Release No. 41232 / March 31, 1999
Administrative Proceeding
File No. 3-9859
_________________________
:
:
In the Matter of :
:
EUGENE J. YELVERTON, JR. :
: ORDER INSTITUTING PUBLIC
: PROCEEDINGS PURSUANT TO
: SECTION 8A OF THE SECURITIES ACT
: OF 1933 AND SECTIONS 15(b), 19(h)
: AND 21C OF THE SECURITIES
: EXCHANGE ACT OF 1934, MAKING
: FINDINGS AND IMPOSING REMEDIAL
: SANCTIONS AND CEASE-AND-DESIST
Respondent : ORDER
:
__________________________:
I.
The Commission deems it appropriate and in the public
interest that public proceedings pursuant to Section 8A of
the Securities Act of 1933 ("Securities Act") and Sections
15(b), 19(h) and 21C of the Securities Exchange Act of 1934
("Exchange Act") be, and they hereby are, institituted
against Eugene J. Yelverton, Jr. ("Yelverton" or
"Respondent").
II.
In anticipation of the institution of these
proceedings, the Respondent has submitted an Offer of
Settlement ("Offer") which the Commission has determined to
accept. Solely for the purpose of these proceedings and any
other proceeding brought by or on behalf of the Commission
or to which the Commission is a party, the Respondent,
without admitting or denying the findings set forth herein,
except as contained in Section III 1 and 2, below, and as to
the jurisdiction of the Commission over the Respondent and
over the subject matter of these proceedings, which are
admitted, consents to the entry of this Order Instituting
Public Proceedings Pursuant to Section 8A of the Securities
Act of 1933 and Sections 15(b), 19(h) and 21C of the
Exchange Act of 1934, Making Findings, and Imposing Remedial
Sanctions and Cease-and-Desist Order ("Order").
III.
Based on this Order and the Respondent’s Offer, the
Commission finds the following. [1]
1. Thorn, Welch & Co., Inc., ("TWC"). TWC" is a
registered broker-dealer located in Jackson, Mississippi.
TWC has been registered with the Commission pursuant to
Section 15(b) of the Exchange Act since on or about March
10, 1977. On November 22, 1993, the firm changed its name
to Thorn, Welch & Co., Inc. TWC's business consisted
primarily of underwriting and trading municipal securities.
2. Yelverton. Thorn" is a resident of Jackson,
Mississippi. From 1987 through 1990, Yelverton was a
consultant to TWC. From 1990 through the present, Yelverton
has been a shareholder of TWC. Yelverton was a municipal
securities principal of TWC from January 1991 through 1996.
3. Between November 1987 and May 1996, TWC was the
underwriter for 74 offerings of urban renewal revenue notes
("notes") issued by 39 Mississippi political subdivisions,
including counties, cities and towns ("municipalities").
The offerings raised a total of approximately $287,300,000.
4. In each offering, the notes were sold based upon a
representation that bond counsel had concluded that interest
on the notes would be excludable from gross income for
federal income tax purposes. The disclosure documents used
in connection with the note offerings represented that the
note proceeds would be utilized within three years on
various public projects. In fact, the municipalities had no
intention of spending more than a small percentage of the
proceeds on public projects. That percentage, generally
close to one percent of the proceeds, was received by the
municipality as a "premium" or "fee" for issuing the notes.
The remaining proceeds were invested in guaranteed
investment contracts ("GICs") or certificates of deposit
("CDs") yielding a higher rate of return than the notes.
Those instruments provided the cash flows to pay the debt
service required by the notes. This financing structure
resulted in a significant risk to the tax exempt status of
interest on the notes.
5. Internal Revenue Code ("IRC") Section 103(b)
provides that gross income includes interest on any state or
local bond which is an "arbitrage bond" as that term is
defined by IRC Section 148. IRC Section 148 (a) defines an
arbitrage bond as "any bond issued as part of an issue any
portion of the proceeds of which are reasonably expected (at
the time of issuance of the bond) to be used directly or
indirectly (1) to acquire higher yielding investments...."
6. IRC Section 148(c)(1) allows the proceeds of
certain issues to be invested in higher yielding investments
for a reasonable temporary period until such proceeds are
needed for the purpose for which the bonds were issued.
This provision is known as the "temporary period exception."
It provides that the bonds will not be treated as taxable
arbitrage bonds if the net sale proceeds and investment
proceeds of an issue are reasonably expected to be allocated
to expenditures for capital projects within specified time
periods. Treas. Reg. Sec. 1.148-2(b)(1) and
2(e)(2)(i)(1993); Treas. Reg. Sec. 1.103-13(a)(2) (1979).
When statements regarding reasonable expectations with
respect to the amount and use of the proceeds are not made
in good faith, the notes are deemed to be taxable arbitrage
bonds. Revenue Ruling 85-182, 1985-2 C.B. 39.
7. Although all the note offerings were purportedly
structured to comply with the requirements of the temporary
period exception, at the time of the offerings, none of the
issuers had the resources, intent or expectation to utilize
any proceeds from the offerings, other than the premium or
fee, for capital projects. Subsequent to the offerings,
none of the issuers utilized any of the offering proceeds,
other than the premium or fee, for any capital project. The
lack of a reasonable expectation to utilize more than a
small portion of the proceeds for capital projects would
violate the reasonable expectation requirements of IRC
Section 148(c)(1) and Treas. Reg. 1.148-2(e)(2). Therefore,
a substantial risk exists that the issuers did not satisfy
the requirements of the temporary period exception, making
the structure of these transactions a prohibited arbitrage
scheme that violates IRC Sections 103(b) and 148(a)(1). The
violation of these sections created a substantial risk that
the IRS would declare interest on the notes includable in
gross income for federal income tax purposes.
8. The substantial risk to the tax exempt status of
interest on the notes was not disclosed to investors or
prospective investors in any of the offerings. The
official statements and arbitrage certificates for each
offering, among other documents, without exception,
represented that the issuers intended to spend the full
amount of the offering proceeds within three years on
various capital projects, such as roads, parks, a
courthouse, and other projects. Each official statement also
represented that the issuer was negotiating with a specified
firm for "architectural services." These statements were
not true. Although the investors were under no duty to
independently evaluate the degree of risk to the tax
exemption, the false representations dealing with the
municipalities' intentions to spend the proceeds and their
current negotiations for services in that regard, would have
made it difficult for investors, even those with access to
tax advice, to ascertain the risk to the tax exemption.
9. TWC, through Yelverton and others, sold the notes
from each of the offerings using the official statements.
Yelverton knew, or was reckless in not knowing, that the
official statements misrepresented the issuers’ intent to
spend the proceeds of the offerings on municipal projects.
Yelverton also knew, or was reckless in not knowing, that
the tax exempt status of the notes was contingent on the
issuers having a bona fide intent to utilize the note
proceeds on municipal projects within three years from the
date of the offering. Yelverton knew, or was reckless in
not knowing, that a substantial risk existed as to the tax
exempt status of interest payment on the notes. That risk
was not disclosed to purchasers of the notes.
10. During the period from November 1987 through May
1996, Yelverton willfully violated Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder by, directly and
indirectly, using the means and instrumentalities of
interstate commerce and the mails to: (1) employ devices,
schemes and artifices to defraud; (2) make untrue statements
of material facts and to omit to state material facts
necessary in order to make the statements made, in the light
of the circumstances under which they were made, not
misleading; and (3) engage in acts, practices, and a course
of business which operated or would have operated as a fraud
and deceit upon persons, in connection with the purchase and
sale of securities, as more particularly described in
paragraphs one through nine, above.
11. During the period from November 1987 through May
1996, Yelverton willfully violated Section 17(a) of the
Securities Act by, directly and indirectly, using the means
and instruments of transportation and communication in
interstate commerce and the mails to: (1) employ devices,
schemes and artifices to defraud purchasers; (2) obtain
money and property by means of untrue statements of material
facts and omissions to state material facts necessary in
order to make the statements made, in the light of the
circumstances under which they were made, not misleading;
and (3) engage in acts, practices and a course of business
which operated or would have operated as a fraud and deceit
upon purchasers, in the offer and sale of securities, as
more particularly described in paragraphs one through nine,
above.
.
12. Respondent Yelverton has submitted a sworn
financial statement and other evidence and has asserted his
financial inability to pay disgorgement plus prejudgment
interest. The Commission has reviewed the sworn financial
statement and other evidence provided by Respondent
Yelverton and has determined that Respondent Yelverton does
not have the financial ability to pay completely
disgorgement of $877,350, plus prejudgment interest.
13. Yelverton has submitted sworn financial statements
and other evidence and has asserted his financial inability
to pay a civil penalty. The Commission has reviewed the
sworn financial statements and other evidence provided by
Yelverton and has determined that Yelverton does not have
the financial ability to pay a civil penalty.
ACCORDINGLY, IT IS HEREBY ORDERED,
1. that Respondent Yelverton be barred from
association with any broker, dealer, municipal securities
dealer, investment adviser or investment company;
2. that Respondent Yelverton cease and desist from
committing or causing any violation or any future violation
of Section 17(a) of the Securities Act or Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder;
3. that Respondent Yelverton shall pay
disgorgement of $877,350, plus prejudgment interest,
provided that Yelverton shall pay $3,000 within thirty (30)
days of this order and shall pay an additional $27,000
within 270 days to the United States Treasury. Such payment
shall be (a) made by United States postal money order,
certified check, bank cashier's check or bank money order;
(b) made payable to the Securities and Exchange Commission;
(c) hand-delivered or delivered by overnight delivery
service to the Comptroller, Securities and Exchange
Commission, Operations Center, 6432 General Green Way, Stop
0-3, Alexandria, VA 22312; and (d) submitted under a cover
letter which identifies Yelverton as a respondent in these
proceedings. Yelverton is further ordered to comply with
his undertaking to forego on any personal income tax return
all unused income tax credits which have accrued and to
which he may be entitled as of the date of this Order
arising from his interest in the seven limited partnerships
which own low-income housing projects financed by urban
renewal revenue bonds underwritten by TWC between August
1992 and October 1993. Payment of the remainder of the
disgorgement is waived based upon Respondent Yelverton’s
demonstrated financial inability to pay;
4. that the Division of Enforcement ("Division")
may, at any time following the entry of this Order, petition
the Commission to: (1) reopen this matter to consider
whether Respondent Yelverton provided accurate and complete
financial information at the time such representations were
made; and (2) seek any additional remedies that the
Commission would be authorized to impose in this proceeding
if Respondent Yelverton’s offer of settlement had not been
accepted. No other issues shall be considered in connection
with this petition other than whether the financial
information provided by Respondent Yelverton was fraudulent,
misleading, inaccurate or incomplete in any material respect
and whether any additional remedies should be imposed.
Respondent Yelverton may not, by way of defense to any such
petition, contest the findings in this Order or the
Commission's authority to impose any additional remedies
that were available in the original proceeding;
By the Commission.
Jonathan G. Katz
Secretary
**FOOTNOTES**
[1]: The findings herein are made pursuant to the Offer
of Settlement of the Respondent and are not binding
on any other person or entity named as a
respondent in this or any other proceeding.